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The call for improved corporate responsibility in the wake of the scandals emanating from Enron, ImClone Systems, Tyco, WorldCom, AOL Time Warner, Adelphia and Arthur Andersen is echoing across the country. The crisis is so severe it prompted President George W. Bush to travel to Wall Street this summer to announce a 10-point plan that “[w]ill use the full weight of the law to expose and root out [corporate] acts of corruption.” [FOOTNOTE 1] The president’s plan includes the formation of a new task force to prosecute corporate criminal activity and seeks to impose longer prison terms for executives guilty of fraud. Congress also has weighed in on the subject. Hours after the president’s announcement in July, the Senate voted 97-0 to establish enhanced government powers to target corporate fraud, going beyond what even the president has proposed. [FOOTNOTE 2] The Senate’s bill, which was an attempt to strengthen the provisions of a House bill that passed in April, sought to create a new corporate-fraud chapter in the federal criminal code, designating a category of crime for any “scheme or artifice” to defraud shareholders. [FOOTNOTE 3] On July 24, House and Senate leaders made good on their pledge to reconcile their competing corporate responsibility bills by passing the most far-reaching business regulation since the 1930s. [FOOTNOTE 4] Despite Congress’ action, still others are demanding even more sweeping reforms, such as the creation of a new regulatory system to police corporate wrongdoing. [FOOTNOTE 5] COOPERATION REDEFINED The import of these declarations and initiatives are unmistakably clear: Companies facing government investigations in the post-Enron era can be certain their business practices will be placed under an unprecedented level of scrutiny. As federal prosecutors are driven by President Bush’s call to be even more aggressive in ferreting out corporate wrongdoing, it will become increasingly difficult for an organization to avoid substantial criminal — or civil — penalties once the eye of suspicion is cast upon it. As Arthur Andersen has learned, a company’s willingness to agree to a criminal resolution, pay hundreds of millions of dollars in civil penalties, and agree to submit to years of government oversight may not be sufficient to avoid indictment in this new climate. The term “cooperation” has been redefined by the Enron scandal and it may now demand the waiver of the attorney-client and work product privileges. JUSTICE DEPARTMENT GUIDANCE In the past, it would have been considered “bad manners” for a prosecutor to ask for a waiver of the attorney-client privilege. [FOOTNOTE 6]There was “a sense that the privileges were sacred.” Requesting such waivers began as an infrequent practice about 10 years ago in a few U.S. Attorney’s Offices, particularly in the Southern District of New York. This practice, however, recently culminated into a Department of Justice guidance. In 1999, the Justice Department issued the most extensive statement to date regarding what federal prosecutors may rely on in conducting corporate investigations. In a document entitled Federal Prosecution of Corporations, it outlined the following factors that prosecutors should consider in determining whether to begin an investigation, bring charges, and negotiate plea agreements: � The nature and seriousness of the offense; � The pervasiveness of wrongdoing within the corporation, including the complicity in, or condonation of, the wrongdoing by corporate management; � The corporation’s history of similar conduct, including prior criminal, civil and regulatory enforcement actions against it; � The corporation’s timely and voluntary disclosure of wrongdoing and its willingness to cooperate in the investigation of its agents, including, if necessary, the waiver of the corporate attorney-client and work product privileges; � The existence and adequacy of the corporation’s compliance program; � The corporation’s remedial actions; and � The adequacy of non-criminal remedies, such as civil or regulatory enforcement actions. [FOOTNOTE 7] These guidelines are consonant with those utilized by the Securities and Exchange Commission, the Environmental Protection Agency and other investigatory branches of the federal government. They reflect the general view that if a company makes a good-faith, bona fide effort at avoiding criminal activity, the government will be less inclined to prosecute if the criminal activity occurs despite that bona fide effort. What sets them apart from any previous edict or guideline issued by the Justice Department is the extent to which they expound upon the nexus between corporate cooperation — and accompanying leniency — and the waiver of the attorney-client and work product privileges. Footnote 9 of the Holder Memorandum provides: [I]n assessing the adequacy of a corporation’s cooperation is the completeness of its disclosure including, if necessary, a waiver of the attorney-client and work product protections, both with respect to its internal investigation and with respect to communications between specific officers, directors, and employees and counsel. Such waivers permit the government to obtain statements of possible witnesses, subjects, and targets, without having to negotiate individual cooperation or immunity agreements. In addition, they are often critical in enabling the government to evaluate the completeness of a corporation’s voluntary disclosure and cooperation. The Holder Memorandum cautions that a waiver should not be a sine qua non of cooperation and that waivers of the privilege should be limited to the factual internal investigation and not extend to advice concerning the government’s investigation. However, in practice, it should be expected that federal prosecutors will abandon these caveats. The Arthur Andersen case stands as a striking case in point. ARTHUR ANDERSEN Under most objective standards, Arthur Andersen did everything in its power to avoid a prosecution that it acknowledged would be a “death penalty” for the firm. [FOOTNOTE 8] Once it learned of the document destruction in its Houston office, it immediately notified the Justice Department and the SEC, and cooperated with both entities. [FOOTNOTE 9]As to its criminal liability, Andersen was willing to enter into a joint resolution with the Justice Department and the SEC that included, among other things, a three year deferred prosecution agreement — in essence a guilty plea — under which the government could have appointed a special monitor to oversee compliance with its new document retention policy and with other reforms to be approved by the Justice Department. Further, as part of this joint resolution, the company was prepared to execute the immediate separation from the firm all individuals — at whatever level — responsible for the document destruction or whose failures of oversight and negligence made the destruction possible. As to civil penalties, in February, Andersen was reported to have offered to pay as much as $750 million to Enron shareholders who sued Andersen for its role in auditing Enron’s books. [FOOTNOTE 10]The only concession it reportedly was unwilling to make was waiving its attorney-client and work product privileges. [FOOTNOTE 11] As to waiving privilege, Andersen undoubtedly found itself between the proverbial rock and a hard place. Courts have consistently emphasized that voluntary (as opposed to compelled) disclosure of privileged information to a government agency waives the company’s privilege as to all other parties. [FOOTNOTE 12] Further, none of the enumerated exemptions to the Freedom of Information Act expressly absolves a government agency from providing a FOIA petitioner with attorney-client communications disclosed voluntarily by corporations. [FOOTNOTE 13]Thus, waiving the attorney-client and/or work product privileges in an effort to gain leniency from federal prosecutors involved risks that may have proven greater than the ones waiting for them in the Texas federal courtroom. They chose the later and as a result of the jury’s guilty verdict, now face a sentence that is tantamount to a death penalty for the firm. It remains a serious point of debate as to whether a policy of making cooperation contingent on the waiver of the attorney-client privilege and work product privileges actually operates to deter cooperation as opposed to promote it. Nonetheless, as the White House and Congress continue to urge investigators to prosecute any and all corporate infractions to the fullest extent of the law, it is a practice that will likely become commonplace. The foregoing underscores the importance of having an effective compliance program in place — and running it well — long before the occurrence of criminal activity. While an effective compliance plan will not guarantee that a company under investigation will avoid indictment, it may be the only means by which a company can demonstrate its good-faith, bona fide effort to police itself against criminal activity, thereby minimizing potential fines and penalties. No compliance plan is foolproof but it must be more than a mere “paper program.” [FOOTNOTE 14]The Holder Memorandum as well as the Federal Sentencing Guidelines delineate certain components that are essential in formulating a compliance program that will be considered effective in preventing and detecting violations of law. [FOOTNOTE 15] Accordingly, a company should attempt to incorporate the following guidelines into any compliance plan: � A company must establish a system that is tailored to the idiosyncrasies of its organizational structure and its work environment. � Senior level employees must be responsible for compliance program. � The compliance program should be written in a way that is easily understandable by all employees and employees should be required to participate in training programs. � The company must take reasonable steps to achieve compliance with its standards by utilizing monitoring and auditing systems reasonably designed to detect criminal conduct. � The standards must be consistently enforced through appropriate disciplinary mechanisms, including, when appropriate, discipline of persons responsible for the failure to detect offenses. [FOOTNOTE 16] CONCLUSION As the Andersen case fades to the background, and the WorldCom, ImClone and other scandals take center stage, the answer to the question of whether the government will treat the waiver of the attorney-client and work product privileges as a condition of cooperation, or merely a request made only in rare instances, will become clearer. Regardless of which path the government takes, the existence of a carefully crafted and effective internal compliance program may very well be the deciding factor in whether a company that has caught the attention of federal prosecutors will be able to avoid an investigation or be forced to face a death penalty of its own. Stanley A. Twardy Jr., a former U.S. Attorney for the District of Connecticut, is the chair of Day, Berry & Howard’s ( www.dbh.com) government investigations practice group. Gary H. Collins, a former Assistant U.S. Attorney for the District of Columbia, is counsel in the firm’s government investigations practice group. ::::FOOTNOTES:::: FN 1Jeanne Cummings, Jacob M. Schlesinger & Michael Schroeder, Bush Crackdown On Business Fraud Signals New Era, Wall. St. J., July 10, 2002, at A1. FN 2Shailagh Murray & John D. McKinnon, Senate Passes Tough Fraud Bill In Unanimous Vote, Going Beyond Bush Plan Lawmakers Push Ahead On White-Collar Crime, Wall. St. J., July 11, 2002, at A3. FN 3Shailagh Murray, Bill Overhauling Audit Regulation Passes in Senate, Wall St. J., July 16, 2002. FN 4Shailagh Murray & Michael Schroeder, Corporate-Governance Bill Advances in Congress: House and Senate Leaders Endorse Major Changes in Accounting Regulations, Wall St. J., July 25, 2002, A3. FN 5Edwin Chen & Richard Simon, Bush Pushes Corporate Cleanup: Additional Power, Money For Regulators, More Jail Time for Fraud, Hartford Courant, July 10, 2002. FN 6ABA/BNA, Lawyers’ Manual on Professional Conduct, DOJ Guideline on Corporations’ Waiver Of Attorney-Client Privilege Draws Criticism, Vol. 17, No. 7 (March 28, 2001). FN 7Memorandum Regarding Federal Prosecutions of Corporations, U.S. Deputy Attorney General, Eric H. Holder, Jr., ��III-IX (“Holder Memorandum”) (June 16, 1999). FN 8Eric Lichtblau, Walter Hamilton & Jerry Hirsch, Andersen, U.S. Meet to Resolve Criminal Charge, Los Angeles Times, April 6, 2002. FN 9Arthur Andersen LLP Letter of Response to Justice Department, at 1 (March 13, 2002). FN 10Andersen, U.S. Meet to Resolve Criminal Charge, supra n. 14. FN 11 See Andersen, U.S. Meet to Resolve Criminal Charge, supra n. 14; see also Department of Justice Guideline on Corporations’ Waiver of Attorney-Client Privilege Draws Criticism, supra n. 6 (observing that companies may want to plead guilty but not at the cost of waiving the attorney-client and work product privileges); Nancy Horton Burke, The Price of Cooperating with the Government: Possible Waiver of Attorney-Client and Work Product Privileges, 49 Baylor L. Rev. 33, 62-67 (1997) (same). FN 12The 2nd, 3rd, 4th, and D.C. Circuits have all addressed the doctrine of limited waiver but refused to embrace it. See In re Steinhardt Partners, L.P., 9 F.3d 230, 235 (2d Cir. 1993); Westinghouse Electric Corp. v. Republic of the Philippines, 951 F.2d 1414, 1420-21 (3d Cir. 1991); In re Martin Marietta Corp., 858 F.2d 619, 626 (4th Cir. 1988); Permian Corp. v. United States, 665 F.2d 1214, 1220-25 (D.C. Cir. 1981). FN 13 Seegenerally Toran, Information Disclosure in Civil Actions: The Freedom of Information Act and The Federal Discovery Rules, 49 Geo. Wash. L. Rev. 843, 848-54 (1981). FN 14Holder Memorandum, supra n. 11, �VII (Comment). FN 15 Id.; U.S. Sentencing Guidelines Manual ��8C2.5(f), (g) (1996). FN 16For a discussion of frequent compliance program problems, seeTarun, 13 Common Problems with Compliance Programs, Vol. 5, Business Crimes Bulletin: Compliance and Litigation No. 10 (Oct. 1998); see also Corporate Internal Investigations, Webb Tarun & Molo, �16.04[5].

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